Investors Tire of TIPS As Inflation Remains Absent

By Michael Aneiro

Investors have been on alert all year for the first signs of any significant rise in inflation and/or interest rates. So far it hasn’t happened. A lot of investors have been piling into bank loans and other floating-rate investments that offer downside protection while still providing respectable income in the meantime.

Investors who have poured money into Treasury inflation-protected securities, or TIPS, however, aren’t really getting the respectable income part of that equation, and they’re getting tired of waiting around for something that isn’t happening, especially as they’ve watched prices of gold, crude oil and other commodities fall sharply of late. Carolyn Cui reports in today’s Wall Street Journal that this week’s Labor Department report showing a drop in the March consumer price index, mainly due to gas prices falling 4.4%, might be the last straw for some TIPS investors who are starting to head for the door:

While tame inflation brings relief to consumers, it is typically bad news for TIPS investors. Their bond portfolios will lose in prices as inflation expectations subside. Bond prices move inversely to yields….

Some investors rushed into TIPS last year, after the Federal Reserve announced a new round of bond-buying programs. Demand for the securities further surged early this year when gasoline prices jumped on supply concerns.

However, the fears have abated quickly, largely thanks to a slump in gasoline prices. Recent disclosures that Fed officials were seeing a gradual exit strategy from their quantitative-easing policies also have helped guide down investor expectations for further expansion of its monetary base….

“All those things suggest future inflation over the next month or two may decline from very low levels today,” said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund, with $300 million in assets. The fund has been moving assets to high-yielding bonds, as “we do not find that much value in TIPS anymore,” he said.